A National Wealth Fund for the UK

Ethan Ilzetzki and Marta Grzana

Friday, October 11, 2024

​

Summary

The September 2024 CfM survey investigated proposals to found a National Wealth Fund (NWF) in the UK. The panellists were asked whether they think that the NWF would be effective in increasing UK’s investment and economic growth. The panel was also asked whether they are concerned about the affordability of the NWF, given the current high levels of government debt. The results showed that most of the panellists were not confident in the NWF’s ability to boost growth. The panel was roughly equally split between those supporting and opposing the creation of a NWF, . However, even supporters of the NWF expressed low confidence in its impact and expressed many caveats. On the financing of the NWF, the panel expressed little concerns about the affordability of the NWF.

Background

The September 2024 CfM survey asked the panel whether a National Wealth Fund would be effective in boosting UK’s investment and growth, and whether the fund is affordable given UK’s high levels of public debt.

National Wealth Fund

In July of this year, the UK Treasury and Department of Trade and Business began work on the creation of a National Wealth Fund (NWF). It would encompass the current UK Infrastructure Bank and the British Business Bank. The Taskforce will be chaired by the Green Finance Institute and will include former Bank of England Governor Mark Carney, Barclays CEO C.S Venkatakrishnan, and Aviva CEO Dame Amanda Blanc (HM Treasury, 2024). The fund is the first indication of Labour’s plans to increase investment towards bringing the UK to a “net-zero” economy and create green jobs. It intends supporting investments in green steel, green hydrogen, industrial decarbonisation, gigafactories, and ports (Barradale, 2024). Secretary of Business and Trade Jonathan Reynolds set out his four key priorities for the fund: delivering an industrial strategy which will be the cornerstone of the government’s growth mission; supporting small businesses, communities and the economy; resetting trade relations and championing British exports; and making work pay (Makortoff & Kollewe, 2024).

The NWF would not be a sovereign wealth fund like those in Norway or Saudi Arabia; it wouldn’t manage cash generated by the government through state-owned natural resources and surpluses from international trade, bank reserves or privatisation projects (Makortoff, 2024). Instead, it would serve as a policy bank – a government-owned financial institution that would invest to help deliver government policy and be financed through government borrowing or taxation (Jameson & Howat, 2024). The NWF was inspired by similar government-backed schemes such as France’s AFD, Germany’s KTF, and Canada’s CGF (Barradale, 2024). The key function of the NWF is not to manage any budget surplus, but rather to boost investment in key industries while giving investors confidence by showing that the government is willing to share the risk of investment into long term infrastructure projects (Makortoff, 2024).

Initially, Labour planned to borrow £28bn to invest in the green economy. That figure was cut in half and almost entirely replaced by the NWF proposal (Barradale, 2024). The NWF will be initially funded through a £7.3bn injection provided by the Treasury and further capital that would come from “closing the loopholes” in the windfall tax on oil and gas companies. Reeves hopes that this initial number will “unlock” £20b in private investment, eventually replacing the initially planned £28bn. The NWF will seek to deploy £1.8bn of public funding to ports, £1.5bn for gigafactories (including for electric vehicles), £2.5bn to clean steel, £1bn for carbon capture and £500m to green hydrogen. Nevertheless, the target is to encourage £3 of private investment for every £1 of public investment by the NWF (Makortoff, 2024).

According to Labour’s manifesto, closing loopholes on a windfall tax on oil and gas giants will contribute to the NWF at an average rate of £1.5bn per annum (ICAEW Insights, 2024). Regardless of whether this is a realistic target, the fund might divert capital from other public priorities, such as hitting long-missed health service waiting time targets by 2029 or building 1.5 million homes over five years (Bloom & Dawson, 2024). Yet, the fund could aid Labour’s green investment goal of decarbonizing electricity by 2030 (Nacvalovaite, 2024).

The NWF is said to be an attempt to battle the low investment rates in the UK. The underlying justification would appear to be that firms face limited access to finance. More plausible causes for low investment are Britain’s blocker-friendly planning system, its (recent) reputation for chaotic governance and a lack of expertise with managing big projects, especially in local government contexts (The Economist, 12/7/24). Another rationale for the NWF is that it will target investments with large externalities, where the private sector tends to underinvest, and public funds could induce private investment. However, concerns have been raised that the public sector has no greater ability to identify attractive investment opportunities than the private sector. Consequently, the fund has a low chance of making high returns and its purpose seems more as a vehicle to fund government social policies than to generate returns (McGoldrick, 2024).

Britain has a long history of state-backed efforts to funnel cash into specialized industries. Some are still running, like the UK Infrastructure Bank or the British Business Bank, which will be pulled under the NWF umbrella. Others are now defunct, such as the UK Green Investment Bank which lost favour and was sold off in 2017 to Macquarie Group. Longer ago, the UK had the 1970s National Enterprise Board, a vehicle that propped up Britain’s manufacturing sector during Harold Wilson’s premiership. The NWF’s chances of substantially decarbonizing and expanding the British economy do not seem much greater than its predecessors (The Economist, 12/7/24).

In the SWF taxonomy, the NWF would be a strategic fund targeting development (non-financial) goals. The largest example of such a fund is Saudi Arabia’s $925bn Public Investment Fund which aims to support Saudi Vision 2030 — an ambitious industrial strategy to transform the economy away from its dependence on oil and boost the country’s international standing. To avoid becoming a generalist fund, NWF must build strong governance by recruiting staff from outside normal civil service channels, paying competitively and functioning independently in pursuit of its goals. That would mean keeping Ministers at arm’s length from operational decisions (Nangle, 2024).

Yet, SWFs are usually built from oil revenues in resource-rich countries, such as Norway and Saudi Arabia. Australia’s Future Fund, in turn, was funded through surplus from privatisations. Meanwhile, the UK has to fund the NWF with debt issuance while having a debt to GDP ratio of nearly 100% (BBC, 2024). Yet that approach is not uncommon with France, Italy, and Belgium building their small SWFs each despite high levels of government debt. Moreover, Singapore, China, and New Zealand have created very large SWFs predominantly using debt, without great natural resource windfalls. Therefore, the UK’s dearth of natural resources does not preclude it from creating a wealth fund, rather it just means that the fund will start out small (Nangle, 2024).

The structure of the UK’s NWF appears to be a transformation of the UK Infrastructure Bank and the British Business Bank, which makes the fund resemble a national development bank rather than a wealth fund, especially given that the initial £7.3bn investment will be allocated through the UKIB. Based on a study done on the main development bank in the world – the BNDES in Brazil – development banks can be effective instruments to increase investment, exports, employment and GDP, particularly when borrowers are micro, small and medium-sized companies. The Brazilian experience also suggests that development banks can serve as important tools to fight against climate change, by reducing deforestation for example. On the other hand, evidence indicates that the greatest difficulty for these institutions is generating positive impacts on productivity, an essential variable for economic growth (Barboza, 2023).

​

Question 1: Do you agree that a National Wealth Fund is an effective strategy to increase UK investment and growth?